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RBI guidelines for at-will licensing of private banks – key features

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On August 1 2016 the Reserve Bank of India (RBI) issued guidelines for the at-will licensing of universal banks in the private sector (the licensing guidelines) which, for the first time, will allow applicants to apply for a banking licence from the RBI at will. Previously, the RBI invited applications only during specified windows. Under the block licensing regime, the RBI issued 10 bank licences in 1993, two bank licences in 2001 and, most recently, two bank licences in 2013 under the 2013 licensing guidelines (2013 licensing guidelines).(1)

Key features

The licensing guidelines prescribe detailed guidelines for new banks in respect of, among other things:

eligible promoters;

corporate structures;

shareholding (including foreign investment limits); and

decision-making procedures.

Below are the key features of the guidelines.

Eligible promoters
Both individuals (with 10 years of experience in banking and finance at a senior level) and corporate entities are eligible to promote banks under the licensing guidelines. Private entities and groups (which are "owned and controlled by residents") and non-banking financial companies (NBFC) (which are "controlled by residents") with a successful 10-year track record are also eligible to promote banks. Further, NBFCs can convert into banks.(2)

NBFCs cannot apply for a banking licence if:

they are part of a business group that has total assets of Rs50 billion or more; and

the non-financial business of the group is more than 40% of its total assets (in terms of gross income).

Large industrial groups therefore cannot apply for a banking licence.

Corporate structure
Promoters that have other group entities must set up and hold the bank through a non-operative financial holding company (NOFHC). The NOFHC will be a RBI-registered NBFC and hold the promoter's banking and non-banking businesses separately to ring-fence the bank and other financial service entities of the group from other group entities.

Unlike the 2013 licensing guidelines – under which banks had to be set up by individuals or standalone promoting or converting entities with no other group entities – banks need not be set up through an NOFHC.

Promoter equity
At least 51% of the equity share capital of the NOFHC must be held by the promoter or promoter group.(3) The licensing guidelines provide that apart from the bank, the NOFHC is not permitted to set up a new financial services entity for at least three years from the date on which the NOFCH's business was commenced (aside from the existing financial services companies held by the NOFHC).

Bank capital
Banks must have a minimum paid-up share capital of Rs5 billion and thereafter maintain a net worth of at least Rs5 billion at all times. Banks must also list their shares within six years of commencing business.

Shareholding pattern
The promoters or NOFHC must hold a minimum of 40% of the paid-up voting equity capital of the bank for five years from the date on which the bank's business was commenced. Shareholding by promoters or an NOFHC in the bank must be reduced over time.(4) Only the promoters can hold more than 10% of the paid-up voting equity capital of the bank for the first five years. The licensing guidelines expressly require banks to be controlled by Indian residents at all times.

Foreign direct investment
Foreign direct investment is permitted in a new bank as per the existing foreign investment rules (ie, up to 49% under the automatic route and up to 74% with government approval). However, this is subject to the restrictions on promoter shareholding prescribed under the licensing guidelines.

Corporate governance, prudential and exposure norms
Banks must comply with the RBI's corporate governance norms (ie, with respect to the composition of the board of directors and committees). Banks must also comply with the RBI's directions on prudential norms, exposure norms and asset classification.

Application process
Applications will be considered by a standing expert advisory committee (consisting of external experts in banking or finance) which will then be referred to an internal screening committee (consisting of the governor and deputy governors of the RBI) before being recommended to the committee of the RBI central board for an 'in-principle' approval. The in-principle approval is valid for 18 months, within which time the promoter must apply for final approval.

Comment

In its discussion paper issued in August 2013, the RBI recognised the need for "reviewing the current 'Stop and Go' licensing policy" and "adopting a 'continuous authorisation' policy", which the RBI noted keeps competitive pressure on existing banks.

The block licensing regime lead to an artificial shift in the value of banking licences, and did not always give applicants adequate time to think through the commercial aspects of banking licences. The at-will regime will lead to increased transparency, better innovation and more realistic valuations, and is a significant step towards a healthier licensing regime for new private banks in India.

(1) While the banks licensed in 2001 and 2013 have continued to operate, of the 10 banks licensed in 1993, only six continue to operate (either incorporated, merged with a parent or rebranded).

(2) Similar to past practices in limiting the ability of large industrial houses to promote banks, where the entity, group or the group of which the NBFC is part has total assets of Rs50 billion or more, the entity will not be eligible to promote or convert to a bank if the non-financial business of the group accounts for more than 40% of the total assets or income.

(3) Non-promoter shareholding in the NOFHC cannot exceed 49% of the NOFHC's equity share capital. No non- promoter entity is permitted to hold more than 10% of the total shareholding of the NOFHC or have any significant influence in the NOFHC.

(4) Shareholding of the promoters or NOFHC in the bank will be reduced (from the date on which the bank's business was commenced) to:

40% within five years;

30% within 10 years; and

15% within 15 years.

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